Q3 2020 Spok Holdings Inc Earnings Call
Morning, and welcome to Spoks, 2023rd quarter Investor call. Today's call is being recorded online today, we have Vince Kelly, President and Chief Executive Officer, and Mike Wallace, Chief Operating Officer, and Chief Financial Officer.
It's time for opening comments I will turn the call over to Mr. Wallace. Please go ahead Sir.
Good morning, Thank you for joining us for our third quarter 2020 investor update.
Before we discuss our operating results I want to remind everyone that todays conference call may include forward looking statements that are subject to risks and uncertainties relating to spoks future financial and business performance.
Statements may include estimates.
Of revenue expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions.
Statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.
Actual results could differ materially from those anticipated in these forward looking statements.
Although these statements are based upon assumptions that the company believes to be reasonable they are subject to risks and uncertainties. Please.
Please review the risk factor section relating to our operations and the business environment in which we compete contained in our 2000 Nineteens form 10-K.
Third quarter 2020 form 10-Q, which we expect to file later today and related documents filed with the Securities and Exchange Commission.
Please note that Spok assumes no obligation to update any forward looking statements from past or present filings and conference calls with that I will turn the call over to that.
Thanks, Mike and good morning, everyone I hope all of you and your families and friends remain sales during this challenging time in the midst of this global pandemic.
We are very proud of our team and the part we're playing to support our customers many of whom are on the frontline fighting COVID-19 saving lives.
We are so grateful for the efforts of the doctors nurses administrators and all the first responders who risk their lives daily.
We believe spoke provides a critical function, which has become even more important in this environment.
Providing hospitals, what's a system of action not just a record.
Deliver reliable communications and clinical information, including clinical test results to care teams, when and where it matters most to improve patient outcomes.
We know that smarter faster communication is more important now than ever missed the health care industry continues to transform we remain committed to supporting the hospitals across the nation we.
Reliable communication technology, you spoke go our new cloud native platform powered by Amazon Web services are you done less.
Well, we're still operating under the impact and uncertainty of the pandemic and many of our customers were already challenged by constrained operating margins continue to struggle with the challenges presented by COVID-19, Oh.
Outlook is improving as we saw many positive developments during the quarter.
Third quarter results were encouraging.
We saw strong performance in a number of key operating measures both sequential and year over year improvements. Most importantly, I'm pleased to announce that during the quarter. We closed our first two significant spoke go deals totaling 812000 in aggregate contract value.
A few moments I will provide more color on our performance that our chief operating officer, and Chief Financial Officer, Michael Wallace will cover our financial performance, but before I turn it over to Mike here is an overview of our results for the quarter and the nine months of 2020.
During the quarter, we saw significant increases in software operations bookings on both the sequential and year over year basis as well as continued strong trends in our wireless business and record levels for our software revenue backlog third quarter performance was supported by continued strong software maintenance renewals improved operating expense levels.
So far this year spoke has generated over 4 million in adjusted EBITDA growing our cash balances to over 79 million at the end of the third quarter, while we totaling 7.4 million of capital to our stockholders.
That since our formation in 2000 and for Spok is generating over 1 billion in free cash flow the majority of which we have returned to our shareholders.
Through the first nine months of the year in the middle of a 100 year pandemic, we had paid our quarterly dividend grown our cash balances and enhanced our product offerings through our continued investments in our cloud native integrated communication platform Spok go.
Earlier in the quarter, we were excited to announce that all 20 adult hospitals and all tens children's hospitals named to the U.S. News and World reports 2020, 2021, best hospitals honor roll you spoke clinical communication solutions to facilitate care collaboration and support exceptional.
<unk> patient care.
For eight consecutive years focus partnering with all of the adult best hospitals, we congratulate our customers to this much deserved and pretty steep prestigious recognition and we're proud to support hospitals, who are the best at what they do pardon.
Partnering with these hospitals they continue to bell curve in 19 reminds us what we do matters here so [noise].
Also we believe this recognition enhances our credibility and provides momentum as earlier. This month, we welcomed more than 600 attendees to connect 20 virtual our annual user conference for health care professionals, but.
Virtual event provided health care clinicians I T experts and C suite executives a chance to learn more about our plans, our new cloud native solutions Bogo and exchange information with one another about the future of care team communication, while sharing insights about how the Cokemaking pandemic has changed how they use health.
Okay.
20, Twond. He has been one of the most difficult unprecedented periods in health care as we look toward the future of healthcare communication. There are many unknowns yet one thing is certain health.
Health care has not changed the importance of care team communication has not changed.
This year, we were pleased to present or annual conference in a virtual format at no cost to our customers as a gesture of gratitude.
All the front line professionals. The two day event featured speakers from hospitals and health systems, who shared lessons and the response to COVID-19, how to improve care through better communication and tips to improve efficiencies in the contact center.
Attendees also saw the newest capabilities of spoke go.
In the past we've received request from investors to attend our user conference. We've wanted to maintain our focus at the conference all our customers. However.
However, we appreciate that the content of the conference may be of interest to our investors. So this year for our Investor update on November 10th spoke we'll be providing access to selected presentations from our October connect 20 user conference.
Sales of how to access the conference presentations will follow shortly.
Now I'll briefly review some key results first CIRCOR.
Third quarter software bookings exceeded 21 million were up on both the sequential and year over year basis.
Third quarter bookings included 9.4 million in operations bookings up from $5.8 million in the prior quarter.
Our related software backlog at September Thirtyth was a record 51.7 million up on a sequential basis about 7%.
Additionally, sustained revenue renewal rate on software maintenance contracts contributed to our quarterly performance similar.
Similar to our wireless revenue stream software maintenance revenue was largely a recurring revenue stream that provides the company with a more stable revenue base.
Through the first nine months of 2020, approximately 83% of our revenue base is recurring in nature.
This includes both wireless revenue and software maintenance revenue.
Second.
Wireless subscriber and revenue trends continued to exceed our expectations.
Both posted solid results for wireless products and services in the third quarter. The net decline in paging units totaled 1.9% and was down 40 basis points from the prior year quarter.
Additionally, ARPU or average revenue per unit was up from the prior quarter.
As a result quarterly wireless revenue was down 1.2% from the prior quarter, a 20 basis point improvement from both the prior and year ago quarters.
This is among the lowest wireless revenue erosion in our history. We were pleased to see the improvement in these more stable trends, especially in our top performing healthcare segment, which comprises nearly 84% of our paging subscriber base.
In addition to our financial performance progress was made in several other areas, including product development sales strategy and key strategic partnership agreements.
From a development standpoint in the third quarter, we were proud to announce its focus around system and organizational controls or Soc to type two compliance for both spoke though and our paging solutions. This designation follows work performed by a big four auditor confirms that spokes information security practices.
Policies and procedures and operations meet the Soc to type two standards for managing customer data based on three trust surface principles security availability confidentiality.
Cyber security is become a top priority for executives in all industries, but especially in health care by earning Soc to type two compliance for our Spok go platform. We are now in a position to provide our customers with an additional level of security controls for protecting patient data.
I'm pleased to report that spoke us maintain soc to type two compliance certification on our solutions for the past three years.
Back to compliance certification is most widely recognized method for sharing independently we viewed information about a service organizations internal controls. The accreditation means that spoke solutions meet or exceed the levels of security required for service provider storing customer data in the cloud.
Finally during the quarter, we added 10, new logo healthcare software customers to the Spok family. We also had 23 six figure deals in the third quarter nearly doubled the number of large deals in the previous quarter and consistent with the new sales activity. We saw in the third quarter of 2019.
One of the six figure deals was was a large east coast health care system. Theres also a clinical partner is largest medical school.
Customer just spoke to be their single source of truth for data on call encode messaging, all 30 contact centers within within a system will use the spoke smart console, but.
Customer will also implement messenger redundancy epic in HR data feeds and has committed to five years of prepaid maintenance. We are currently engaged with the customer to includes both go in the future.
And then as I mentioned earlier, we were also pleased to announce that Q3 brought us our first two major sales and spoke go our cloud native clinical communication platform.
The first is with the nation's largest privately operated health system.
Summer chose spok, though because of its user friendly interface scalable cloud native architecture, and the credibility of spokes extensive experience in healthcare solutions. This was a collaborative spokes sales that included more than 30 virtual meetings in the midst of the COVID-19 pandemic to cement the relationship and sealed the deal.
Customer purchased Spok based platform with plans to add clinical care and clinical diagnostics in 2021 and counsel integration in 2022.
Okay. We were pleased to close our first two significant spokeo deals.
Totalling $812000 in aggregate total contract value or T. C V.
With annual recurring revenue or a R. R of 233000, and an average contract length of approximately three years.
Key drivers of our financial performance during the quarter, where software bookings with more than 21 million up almost 39% from prior quarter and a 5% increase from the prior year and resulting in a 7% increase.
And the software revenue backlog level from the prior quarter.
Also contributing to our third quarter, where those portions of our business what your recurring in nature with software maintenance and wireless revenue.
Sustained levels of software maintenance revenue renewals and stable or <unk> and strong performance and gross additions and disconnect impacted units in service in our wireless business each contributing significantly during the quarter.
Lastly are continuing discipline in the management of operating expenses has also allowed us to absorb the impact of our plant investments and product research and development for Spokeo as well as mitigating the negative impacts from the current operating and Mark.
At this time I want to review the key areas, which drove our third quarter financial performance.
Include one those factors impacting revenue too.
Two selected items, which influenced expenses, especially given the significant mitigation efforts employed during the quarter and three a brief review of the balance sheet and cash flow statement.
As usual if you have any specific questions about these items or any of our quarterly financial results I will be happy to address them during the Q&A portion of this morning's call.
With respect to revenue for the third quarter of 2020 total gap revenue was 37.7 million. This compares to 35.7 million in the second quarter of 2020 and $39.5 million and the prior year period.
So the first nine months of 2020 gap revenue totaled 110.7 million. This compares to revenue of $127 million in the first nine months of 2019.
On a gap basis third quarter revenue third quarter software revenue of 16.9 million was up from revenue a 14.7 million in the second quarter of 2020 and is approaching prior your levels.
So the first nine months of 2020 software revenue totaled 47.4 million compared to revenue of $54.2 million and the prior year period, reflecting in the impact of the global pandemic of 2020, an operation bookings and revenue.
Also included in software revenue in the third quarter, albeit small was $24000 in subscription revenue from our cloud native Spokeo platform with the initial bookings discussed previously.
Included in this quarter's financial statements and going forward, we will break out subscription based revenue.
This information is contained in the supplemental information table of our press release and can be sourced in our 10-Q.
In conjunction with our Spokeo transactions. The company provides minor implementation services by our professional services for especially when compared to our legacy on premise business model.
And that is include in their respective <unk>.
These implementation revenues are included in the services line of our detailed revenue table.
Additionally, in 2021 as the total number of our Spokeo transactions increase we anticipate disclosing those key performance indicators critical to our subscription business, including but not limited to T. C V or total contract value average contract links and a R. R. R annual recurring revenue.
Software revenue performance was driven by a more than 42% increase in third quarter software operations revenue from the depressed levels seen in the prior quarter <unk>.
Adding to this was a slight increase in software maintenance rabbit.
From a wireless revenue perspective, and contributing to the year to do performance or stable levels are paid your unit churn and solid are good grades.
As a result wireless revenue for the first nine months remains strong declining a record low 4.9% from the prior year period.
Turning to operating expenses.
We continue to maintain our focus on creating efficiencies in our expense base in order to offset some of the plant increases in product research and development and mitigate the impact of the current operating environment given the impact of the pandemic.
During the third quarter of 2023 reported adjusted operating expenses, which excludes depreciation amortization, an accretion and ads back capitalized software costs of 35.5 million up from $34.1 million and the prior quarter and down from 39.8 million in the year earlier.
The 1.4 million dollar increase in adjusted operating expenses from the prior quarter was driven primarily by an increase of 643000 and cost of revenue, resulting from the previously discussed increase in operations bookings in revenue and a 441000 dollar increase in sales and marketing expense as we.
Ramped up sales of the Spokeo sales software platform and prepared for our connect 20th Virtual conference.
However in comparison to the year ago period, adjusted operating expenses in aggregate declined 4.3 million or nearly 11% largely driven by a decline in virtually all expense categories. As we continued to implement cost containment measures across the organization to offset the impact of revenue off the current <unk>.
Operating environment.
So the first nine months of the year after adding back approximately 8.2 million of capitalized software costs adjusted research and development expenses totaled 19.9 million.
This represents approximately a 3% decline from the same period in 2019, driven primarily from furloughs implemented during 2020.
As stated previously we believe this overall trying to flattening will continue and we are now past. The initial portion of our investments in research and development for our next generation software platform and those expenses are approaching a more steady state level.
R capital expenses in the third quarter, where approximately 934000 consistent with the prior quarter and down from 1.4 million and the year ago quarter.
So the first nine months of 2020 capital expenses totaled 2.8 million.
Down from 4.2 million in the year ago period.
Capital expenses are incurred primarily for the purchase of pagers network infrastructure to support our wireless customers as well as the necessary infrastructure to support our software business we.
We do not expect any significant changes to the level of our capital expense requirements for the balance of 2020.
Turning to the balance sheet and other financial items to the first nine months of the year spoke generated approximately 4.3 million of adjusted EBITDA or earnings before interest taxes, depreciation and amortization, plus stock-based compensation and less capitalized software development costs.
This along with cash on hand, and the positive impact of working capital items was used to fund the quarterly dividends $7.4 million and the affirmation capital expenses of 2.8 million as.
As a result, we ended the quarters with a cash balance of 79.2 million up approximately 1.9 from the December two <unk> December 31st 2019 levels.
Finally spoke has been focused on continuing to understand the impact of the pandemic on our business and the potential for another spite, particularly given the impact of COVID-19 on the installation of our premise based solutions and the rollout of our new cloud Native SAS based Spokeo software solution.
Due to the fluid nature of the situation, we like many of our peer public companies believe that it is most for it to continue to suspend our practice are providing annual guidance for revenue and expenses at this time.
We look forward to returning to our normal guidance format for 2021, when would report our financial results for the fourth quarter of 2020.
With that I'll turn the call back over convinced Kelly for some closing comments before we open the call up to your question.
Thank you Mike before we open the call up your questions I'd like to comment briefly on a couple of items.
First I want to update your current capital allocation strategy.
Second I want to review, our key goals business outlook for the remainder of the year.
With respect our current capital allocation strategy. Our overall goal is to achieve sustainable profitable business growth, while maximizing longterm stockholder value.
Toward that in the allocation of capital remains of primary area of focus on.
Multifaceted capital allocation strategy includes dividends and share repurchases as well as key strategic investments that include augmenting our product development and operating platform and infrastructure.
Our strategy also there's the potential for acquisitions that are both strategic in nature and that are accretive the earnings. However, as I mentioned in prior quarters. Our main focus on development and enhancement spoke go versus acquiring additional functionality right now.
We believe the cost of acquisitions and the integration of disparate architectures is a much less efficient and ultimately limiting.
Situation than the internal billed approach we have taken.
Cause we've outlined in the past four and a transition from a wireless company and the seller of premise based software solutions to a provider of cloud native fast based software solutions in the form of spoke go we believe that financial flexibility of the long term is important to the success of our strategy spoke as laser focused on.
Sally and enhancing the next generation of our software platform and we believe that our cloud native and fully integrated clinical communication platform spoke go will be a game changer and not chosen mark.
I'm happy to report that we're on track with our development efforts and rollout plans and we look forward to taken advantage of what we believe is a large market opportunity for this technology is our customers financial help returns to full strength.
R capital allocation policy includes a recurring quarterly dividend 12, and a half that's for sure and capital investments in our business. Our board of directors will continue to evaluate our capital allocation strategy and will communicate our plans to you each quarter. When we report earnings and then finally with regard to our key business Golden outlook.
With respect to the overall health of our customers. The good news is that outpatient procedures, we're bouncing back to pre pandemic levels in many markets during the third quarter in early October.
However, it's not yet totally clear on the financial damage done in 2020 to our customer base are really what the current big Spike in COVID-19 cases might do to be outlook.
Barring a return to what the market experienced in the spring we believe our activities in investments, thus far position to us to be successful in the fourth quarter and next year. Our business goals are simple may include accelerating development of our products and services and.
Maintaining a strong infrastructure.
Aligning resources, and focusing where most needed to meet customer market demand driving software revenue growth, while managing wireless revenue declines we believe that by focusing on these areas spoke will be able to generate positive free cashflow. The remainder of 2020, we look forward to laying out our expectations for 2021, when we were.
Report, our fourthquarter for your results in February.
At this point I'll ask the operator to open your call the call up for your questions. We're gonna ask you to limit your initial questions to one in a follow up and then we will circle back as as time allows operator.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure your mute function as turned off to allow your signal to reach our equipment.
Again press Star one to ask a question will pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Ryan Vardeman with pelagic capital.
Hey, guys congrats on the Spokeo wins.
Thank you.
Uhm, you reference a large market opportunity.
Early on in a development, we reference to Gartner report that suggested maybe it was a 3 billion dollar opportunity and then maybe talked about it really be a billion dollar subscription opportunity for the solution that we're designing for now that we're further on in the development and have customer data points.
Can you talk to maybe what the total subscription opportunity for us might be over the next five or 10 years.
Yeah, you know a billion dollars just like we said before we think it's an enormous market opportunity obviously, there's a bit of a hiccup right now with the pandemic, but that hasn't changed our long term outlook.
Great and so then the two spoke go wins that we have across how many hospitals are those contracts.
Well, they're they're too individual health care organizations, one of them in particular has a lot of physical.
Physical locations associated with it the other one not quite as many.
So it's like two out of 7000 health care systems in the United States.
Okay, great. Thank you very much.
You're very welcome.
Thank you as a reminder to ask a question. Please press star one we'll take our next question from Richard Darnley with long Port.
Good morning Uhm.
<unk>.
That you reference.
The large the new logos some of which were founded quite large.
Why would they not go with Spokeo or is that a matter of they want to see it in.
There'll be a follower rather than a leader.
We you know great question, and we have a little bit of both so yeah I was talking to one of our major customers U S News and World Report honor Roll Adult Hospital huge research Center academic center and they are very interested in spoke go it's just that they're saying hey, we just wanted to see some.
What else are size and scale use it at first we don't want what we don't want to take a flyer. The other big deals that were not spoke go deals that we sold where deals for instance, with our contact centre solution. So spoke go as a cloud data platform that as a communications layer that ultimately all our service lines will spring office or whether it's in nursing.
Solution, whether it's an easy solution, whether it's a critical test results solution that ultimately whether it's a contact centre solution those will be service lines. It right on top of a platform that is spokeo, but right now the components of that platform that we offer do not include a cloud based a contact centre solution worse.
Still selling our prevalent spaced contact centre solutions is still selling upgrades to existing customers for their solutions and so a lot of the larger deals are just customers doing big upgrades to their existing premise.
Premise based contact centre solutions, but the good news with that is is those upgrades where that they're purchasing are also essentially the gateway to migrate up. So go would spoke is ready because it essentially puts the database and the connectors in place that allow us to once they buy spoke out very quickly set them up and move them up it.
To the cloud and onto our platform. So you're going to see this is I mean this is gonna go on throughout I mean, just to be honest. The next couple of years, you're going to see a hybrid situation, you'll see us picking up some new logo, you know and you'll see us fell on some upgrades and some spoke go to existing customers and finally transitioning.
Just continue to happen here in the in the fourth quarter on October so far we expect that it'll continue for the rest of the quarter and really frankly I.
I think really for the next couple of years, because there's a lot of customers will have different budgetary priorities they'll have different things that they're trying to accomplish or triage. So it will be early adopters, which is good because we want them, we want those reference customers and others will be fast powers and some will just wait. So that's why we had a kind of blend there.
Right well.
You answered one of the follow up along the way so [laughter].
Good answer.
Okay in wireless.
Logical during the Covid in in the recovery process.
People weren't going to start new things logical.
A wireless churn.
Turn would kick back up.
As you go into the.
The first half of 21.
That is a great question and it's.
I don't think it's gonna kick up a lot if it kicks up it'll pick up a little we have had a situation where almost every year since 2004.
All right of wireless sure subscriber revenue erosion has decreased so you think if you graft and it looks like a ski slope and and in like you're approaching the limit I mean, we've had the lowest.
Sure in terms or erosion in terms of revenue last quarter I think in our history. So if it if it bumped up a little some 20 basis points 40 basis points that wouldn't surprise me, but it wouldn't I think much change the outcome.
At all in terms of the kind of a glide path that we seem to be on now with respect to trend.
Right. Okay. Thank you very much.
You're very welcome.
Again to ask a question. Please press star one now.
I am showing no questions in queue I'd like to turn the call back to Vince Kelly.
Thank you very much for joining us. This morning, we look forward to speaking with you again after we released our fourth quarter and full year results from February.
And again I want to remind you are investor update on November 10th and highlighting the presentations from our connect 20 user conference think you'll find that quite quite interesting and rewarding use of your time and we'll get the details on how to access the those presentations.
To you shortly through our Investor Relations portal and our Investor Relations professional al Galgano. Thank you very much stay safe out there and have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].